US: Housing Starts

Tue Apr 19 07:30:00 CDT 2016

Consensus Consensus Range Actual Previous Revised
Starts - Level - SAAR 1.167M 1.120M to 1.195M 1.089M 1.178M 1.194M
Permits - Level - SAAR 1.200M 1.175M to 1.231M 1.086M 1.167M 1.177M

Data on the housing sector are slowing going into the key spring season. Housing starts fell a very sharp 8.8 percent in March to a 1.089 million annualized rate which is well below Econoday's consensus for 1.167 million and below the low estimate for 1.120 million. Permits are showing similar weakness, down 7.7 percent at a 1.086 million rate which is likewise below both the consensus and low estimate.

Weakness in starts is split roughly evenly between single-family and multi-family components with weakness in permits concentrated in multi-families. Nevertheless, there is fundamental strength in the year-on-year rates, at plus 14.2 percent for starts and a less spectacular plus 4.6 percent for permits.

Regional data show declines throughout except for starts in the Northeast with ongoing work tied to a rush last year in permits (on a changes in New York City real estate law). Turning to permits, the Midwest is showing the most strength with a 24.2 percent year-on-year gain followed by the South at 11.3 percent. Not favorable is weakness in the West, a key region for new housing where permits are down a year-on-year 6.1 percent. Permits in the Northeast are down 21.7 percent.

A positive in the report is strength in total completions, up 3.5 percent in the month for a 31.6 percent year-on-year gain. Yet most of this report is downbeat. Spring is the season that those in the housing sector count on, but momentum definitely is not building. Watch for existing home sales for March on tomorrow's calendar.

Market Consensus Before Announcement
Housing starts & permits have swung sharply in recent reports including a big upswing for starts in February together with a big downswing for permits. Forecasters are calling for a reversal in March, a 0.9 percent dip for starts to a 1.167 million annualized pace and a 2.8 percent gain for permits to a 1.200 million rate. A gain for permits, especially one centered in single-family homes, could lift the outlook for what has been an underperforming housing sector.

A housing start is registered at the start of construction of a new building intended primarily as a residential building. The start of construction is defined as the beginning of excavation of the foundation for the building.

Two words...Ripple Effect. This narrow piece of data has a powerful multiplier effect through the economy, and therefore across the markets and your investments. By tracking economic data such as housing starts, investors can gain specific investment ideas as well as broad guidance for managing a portfolio.

Home builders usually don't start a house unless they are fairly confident it will sell upon or before its completion. Changes in the rate of housing starts tell us a lot about demand for homes and the outlook for the construction industry. Furthermore, each time a new home is started, construction employment rises, and income will be pumped back into the economy. Once the home is sold, it generates revenues for the home builder and a myriad of consumption opportunities for the buyer. Refrigerators, washers and dryers, furniture, and landscaping are just a few things new home buyers might spend money on, so the economic "ripple effect" can be substantial especially when you think of it in terms of more than a hundred thousand new households around the country doing this every month.

Since the economic backdrop is the most pervasive influence on financial markets, housing starts have a direct bearing on stocks, bonds and commodities. In a more specific sense, trends in the housing starts data carry valuable clues for the stocks of home builders, mortgage lenders, and home furnishings companies. Commodity prices such as lumber are also very sensitive to housing industry trends.

The housing starts report is the most closely followed report on the housing sector. Housing starts reflect the commitment of builders to new construction activity. Purchases of household furnishings and appliances quickly follow.

The bond market will rally when housing starts decrease, but bond prices will fall when housing starts post healthy gains. A strong housing market is bullish for the stock market because the ripple effect of housing to consumer durable purchases spurs corporate profits. In turn, low interest rates encourage housing construction.

The level as well as changes in housing starts reveals residential construction trends. Housing starts are subject to substantial monthly volatility, especially during winter months. It takes several months to establish a trend. Thus, it is useful to look at a 5-month moving average (centered) of housing starts.

It is useful to examine the trends in construction activity for single homes and multi-family units separately because they can deviate significantly. Single-family home-building is larger and less volatile than multi-family construction. It is more sensitive to interest rate changes and less speculative in nature. The construction of multi-family units can be substantially influenced by changes in the tax code and speculative real estate investors.

Housing construction varies by region as well. The regions of the United States do not all follow exactly the same economic patterns because industry concentration varies in the four major regions of the country. The regional dispersion can mask underlying trends. The total level of housing construction as well as the regional distribution of housing construction is important.

Housing permits are released together with housing starts every month and are considered a leading indicator of starts. In reality, housing permits and starts typically move in tandem each month. However, there are some exceptions. For instance, if permits are issued late in the month, and weather does not permit immediate excavation, then permits might lead starts. For the most part, though, permits are not a good predictor of future housing starts. Incidentally, housing permits (but not starts) are one of the ten components of the index of leading indicators compiled by The Conference Board.